BJP, Govt defeat Left motion on General Anti-Avoidance Rule in Lok Sabha

Finance Minister Pranab Mukherjee today firmly defended deferring the implementation of the General Anti-Avoidance Rules (GAAR), which are aimed at preventing tax evasion and have led to fears that they would target foreign institutional investors. In his reply to the debate on the Finance Bill in the Lok Sabha, he said the deferral of the tax proposals to 2013, announced in Parliament yesterday, was not a result of fear or apprehension.

The Left moved for division on an amendment brought by the government to give effect to the deferral of GAAR, but was defeated 342 to 22, with the BJP backing the government. The Left, accusing the UPA of surrendering to market forces and the US, insisted that GAAR be part of this year's Finance Bill. The Lok Sabha passed the Finance Bill.

In his speech, Mr Mukherjee said, "GAAR I have agreed to defer, but not because of fear or apprehension. I am not afraid of any consequences.â€ He also defended a retrospective tax on overseas deals involving assets in India, such as the one involving Vodafoneâ€™s 2007 acquisition of Hutchison Essar.

Mr Mukherjee said such deals must be guided by double taxation avoidance agreements or the companies must pay tax in India. â€œ(You) Cannot make money on assets made in India by not paying tax in India or somewhere else, some tax haven through a series of subsidiaries and make huge capital gains on assets based in India,â€ he told the House.

The Income Tax department had claimed that Vodafone was liable to pay $2.2 billion in capital gains because the underlying assets for the deal were based in India, but that argument was rejected by the Supreme Court. Mr Mukherjee countered criticism that he was challenging the ruling of the Supreme Court on the retrospective taxation issue by saying that it was solely the right of the legislature to frame laws. "I am aware of the power of legislature, it is the power of legislature to make law. Supreme Court can interpret, but legislature can make amendment to correct the flaw,â€ Mr. Mukherjee said.

â€œLaw has to be framed by us. If there is conflict between intent and interpretation of judiciary, then we respectfully say that it is our right,â€ he added.

Here are the highlights of Pranab Mukherjee's reply to the debate on the finance Bill:

* We need to work with the Opposition.

* Need to revive economic reforms.

* When the real crisis comes, we have the capacity to be united.

* Even reforms could not have been possible without support of Opposition parties.

* We have made and unmade governments; political uncertainty hurts growth.

* Today, nobody can insulate themselves from the rest of the world.

* GDP has come down, growth has moderated.

* Our oil consumption is about 100 million tonnes.

* Today we are talking about high prices; tomorrow we may be worrying about availability.

* Once demand in developing economies grows, oil prices will go up.

* Some price has to be borne by consumer, some by state governments, and some by the Union government.

* Centre not in a position to compensate.

* State taxes are a tax on the tax, they are ad valorem.

* Oil subsidy must be fixed at 2 per cent of GDP.

* I am receiving criticism but the beneficiaries are actually someone else.

* I have seen a high tax regime, where for every Rs 100, one had to pay taxes of Rs 105, this led to massive tax evasion.

* Can the economy bear the burden of fiscal deficit of 5.9 per cent?

* If we can get 3 major economic reforms passed, 2 major tax reforms passed, the economic environment will change, but I can't do it with the numbers we have.

* Import cover is for 7.3 months, half of that under Chidambaram.

* We should be extremely careful about short-term borrowing.

* Presence of external market should remain intact.

* Why did the markets fall? Because for years, FIIs had been bridging gap in current account. This had to happen. Confidence can be brought back.

* UPA not a Congress government, there are others also, some are traditional opponents of Congress.

* There will be a sea change in Indian tax system that will be transparent and will provide tax buoyancy.

* GAAR I have agreed to defer but not because of fear or apprehension. I am not afraid of any consequences.

* From 10 mn tonnes of crude, we increased to 29 mn tonnes. I am concerned that today there are dificulties but we will sort it out.

* On balance of payments, there is difficulty but not insurmountable.

* Non-residents can bring 1 kg of gold. Had to reduce amount for jewellers from 10 kg to 1 kg.

* Sovereign credit rating, for them outlook is negative but rating is not negative. That's why when Standard & Poor's report came, I said it wsa a signal, I will take note and corrective measures must be taken.

* Corrective measures means controlling fiscal deficit, creating environment for investment, flow of funds, flow of technology must be there, but at the same time keeping our eye on domestic demand driven factors.

* Exemptions in customs for wood pulp, solar power project goods and parts for solar lights.

* My argument against Vodafone was on one thing -- either be guided by DTAA or be taxed. Cannot make money on assets made in India by not paying tax in India or somewhere else, some tax haven through a series of subsidiaries. And make huge capital gains on assets based in India.

* Tax liability, if assessment which has been closed, there is no question of re-opening.

* UK did this 21 years ago India is not inferior.

* We cannot be equated with Cayman Islands. We have our rule of law. Many have said 'How can you go against the Supreme Court'? I am aware of power of legislature, it is power of legislature to make law. Supreme Court can interpret, but legislature can make amendment to correct the flaw.

The one year-deferral of GAAR is not on account of any fear or apprehension, asserted finance minister Pranab Mukherjee and warned that India cannot become tax havens just to attract foreign investors. The 30-minute long speech while presenting the finance bill veered around tax direction, crude prices and urgent fiscal action.

The Lok Sabha today passed the finance bill 2012 with amendments. In a strong message to Parliament, the finance minister today defended the amendments to IT act. He said the Supreme Court may interpret the law, but the parliament can amend the law.

The finance minister said India is not an imperial country and reminded the House that UK made exactly same retro amendment. "We cannot have a situation where a company doe not pay anywhere on huge capital gains. Either pay tax here on in your country,â€ he said.

He also assured to sort out states CST claims but linked it to progress on GST. Meanwhile he called for a 3-pronged approach to deal with high crude prices.

According to the government's estimates, FY12 current account deficit is seen at 4.0% of GDP. He stressed that the Budget aim of capping subsidy at 2% of GDP is not a â€˜pipe dreamâ€™.

Economic reforms

Agreeing that confidence in economy will return once key bills are passed, the FM said the government will introduce strong measures to bring it back to recovery path. "Economic mood will change with tax reform and finance bill passage. We need to be extremely careful of short-term external debt and FIIs will support to fund current account deficit," he added.

The FM is confident though high current account deficit is a matter of concern but it can be overcome.

Regarding the much-awaiting GST, Mukherjee ensured that tax compliance will improve with introduction of DTC and GST. However, the government will allot money to states on CSTonly post progress on GST.

He is also assured that the pending DTC can be passed in the monsoon session.

Oil prices

Concerned over growing oil prices, the FM said the government will address issue of under-recoveries of OMCs. However, fuel price hikes would add to inflationary pressures.

He is worried that oil price may rise to USD 150 per barrel. Mukherjee elaborated that the centre can not fully compensate oil companies revenue losses so that the states also should work together on oil taxes.

Finance Bill: Markets like Pranab Mukherjee's diluting GAAR, but other changes are a mixed bag

Finance minister Pranab Mukherjee has done well to dilute the General Anti-Avoidance Rule (Gaar) and other proposals in the Budget that threatened to bring back the dreaded licence raj.

But the move to defer Gaar by one more year probably means that it will be buried. The next Budget will be this administration's last full Budget before general elections in 2014. It is expected to be stocked with handouts and goodies.

Given that, no finance minister will want to sour the popular mood by implementing tough anti-avoidance legislation. That will be a setback to India's struggle to improve tax compliance.

Changes proposed in Gaar, meant to curb sharp practices, will bring more certainty to investors doing business in India.

After Mukherjee's clarification, the burden of proof is on the taxman, not the taxpayer. Allowing taxpayers to seek advance ruling on whether a transaction would be covered by Gaar is also in order.

The other controversial proposal to charge capital gains tax on past deals involving indirect transfer of capital assets located in India stays.

The amendment targets Vodafone, which bought out Hutchison from its mobile business in India.

A retroactive clarification on the intent of the tax law is welcome. Now, the government should settle its dispute with Vodafone by charging just capital gains tax and waiving interest and penalty on the deal.

Such a settlement is necessary for the government to get its dues, avoid unnecessary legal wrangling and send an assurance to potential foreign investors.

Other changes include diluting the proposal to make closely-held companies accountable for the extra amount they receive for their shares. This will make it easier for start-ups to sell their ideas to venture capital funds.

The private equity club will also find exit easier, with a lower capital gains tax. But the rollback on indirect tax measures such as withdrawing the levy on all precious metal jewellery, branded or unbranded, is unwarranted.

Black money will flow into gold and jewellery, defeating the government's goal to muzzle the cash economy. Mukherjee's proposals are a mixed bag, though equity markets like them.

The governmentâ€™s announcement of deferring the General Anti-Avoidance Rules (GAAR) led to the industry heaving a sigh of relief. However, critical voices have said addressing concern was good, though the government also needs to introduce positive policies.

Industry chambers also found the clarifications by Finance Minister Pranab Mukherjee on the retrospective amendments to the Income Tax Act convoluted. They, however, expressed happiness that some of their proposals were accepted by the minister. Industry has been calling for deferment of the GAAR and a detailed discussion on the issue.

Postponement of the GAAR would enhance the confidence of global investors, the chambers have said.
R V Kanoria, president of the Federation of Indian Chambers of Commerce and Industry, said, â€œI hope it is not merely a postponement, but they (the ministry) would also relook it and a more realistic GAAR would be introduced.â€

GAAR has not only been put off by a year; it would also come with more safeguards. In the earlier proposal of the Finance Bill, the onus of proof rested with the tax assessee, and this was seen as a negative move. Today, the minister announced the onus of proof would be with tax officials. Also, the Bill had earlier proposed that the approving panel for invoking the GAAR would comprise only tax officials. Now, independent voices would also be a part of the panel.

Besides the GAAR, the finance minister also clarified retrospective amendments to the Income Tax Act would not be used to reopen the cases where the assessment was finalised.

â€œWe are happy to note that the government has considered industry views and tax rules would not be used with retrospective amendments on cases where final assessments have been made,â€ said Ved Jain, chairman of the national council on direct taxes of the Associated Chambers of Commerce and Industry of India.

The finance minister also clarified retrospective amendments would not override double taxation avoidance agreements. These would be applicable to low tax jurisdictions or tax havens.

Industry members said the clarifications by the finance minister were vague.

Earlier, industry had raised objections to retrospective amendments, which were aimed at bringing complicated foreign deals, like the Vodafone-Hutchison one, under the tax net, in case the underlying assets were in India. Amendments were sought to be made after the Supreme Court had ruled against the tax department in the Vodafone case.

In post-Budget interactions with the finance minister, industry chambers had vehemently criticised this stand. â€œThis is probably the worst time for clarifications of intent and interpretation, when there is all-round uncertainty, political consensus is elusive, and there are hiccups in implementation of decisions,â€ Kanoria had said in one of these meetings.

He had added the industry felt decisions of the court could be overturned, undermining the sanctity of the legal system and questioning the fairness of a parliamentary democracy. However, the finance ministry had rebuffed industry arguments, asking it if it wanted India to turn into a tax haven.

Industry chambers also welcomed the Mukherjeeâ€™s move to cut long-term capital gains tax on private equity to 10 per cent and the 0.2 per cent securities transaction tax on deals involving unlisted companies, instead of a long-term capital gains tax.

The startup ecosystem and angel investors are a relieved lot after Pranab Mukherjee's speech in Parliament on 7 May.

The finance minister has proposed to exempt angel investments from the purview of the proposed share premium tax on closely held companies which was part of Budget 2012.

Said Mukherjee in his speech on the Finance Bill: "It has been proposed in the Finance Bill that any consideration received by a closely held company in excess of the fair market value of its shares would be taxable. Considering the concerns raised by 'angel' investors who invest in start-up companies, I propose to provide an enabling provision in the Income Tax Act for exemption to a notified class of investors."

Organisations like The Indus Entrepreneurs (TiE) and several other angel networks across the country were shell-shocked when, as part of proposals to unearth unaccounted money, the finance minister had proposed a tax on share premiums charged by closely held companies. This effectively meant startups, who are typically closely held and receive funding from angel investors, would also have to pay the tax, which would effectively cause a huge hit on small companies and the entire entrepreneurial ecosystem in the country.

The FM's statement has come as a major boost to the entrepreneurial space.

Firstpost had also reported on the major damage this proposed tax would cause to the spirit of enterprise across the country, particularly for startups.
TiE had also suggested other options to the ministry to get around this problem, particularly by creating exemptions for categories of investors, so that the angel investor ecosystem, which powers entrepreneurship in a major way, is not killed by what was being called the 'startup' tax. The FM's statement has come as a major boost to the entrepreneurial space.

Sources in TiE said it was a huge boost to see that the FM had understood the legitimate concerns of the startups and angel investors and had proposed an exemption to a notified category of investors.

"While we will have to verify the exact wordings in the Act after the proposed Bill gets enacted, we are hopeful this would help sort out the issue," a TiE functionary told Firstpost after the FM's speech on 7 May.

The idea behind the proposed tax is to ensure that unaccounted monies do not find their way into closely held firms under the garb of share premiums. The proposal also envisages convincing the tax assessing officers of the fair value of shares, and the amount charged as premium over the fair value would be subject to the tax. While most agree that unaccounted money may be finding its way into companies through this route, the concern was that startups would be hit and that angel investors, who invest not only money but also time and knowledge through mentoring, would also be penalized along with the actual wrongdoers. Angel investors had likened the tax proposal to bombing a city just to find a criminal.

India said on Monday it would exempt foreign banks from paying tax for setting up local units as it looks to ring-fence such units against external economic shocks.

Finance Minister Pranab Mukherjee made the announcement while initiating a debate on his tax proposals for the 2012/13 fiscal year that began on April 1.
"The Reserve Bank of India (RBI) is formulating a scheme for subsidiarisation of Indian branches of foreign banks to ring fence Indian capital and Indian operations from economic shocks external to the Indian economic scenario," he told lawmakers in parliament.

"To support this effort, I propose to provide tax neutrality for such subsidiarisation."

The RBI favours operating foreign banks to expand by opening wholly owned local units rather than opening branches, to shield them from liquidity shocks and capital constraints in their home markets.

However, foreign banks operating in India have cited high stamp duty and capital gains tax as a hindrance to floating local subsidiaries.
Existing laws require overseas lenders to pay up to 30% of the market value of their assets as capital gains and stamp duty while converting branches to a new entity.

The lenders as well as the RBI had requested the government to provide an incentive or a level playing-field to make the subsidiary model viable.

The markets do not seem to be in sync with Pranab Da. Parliament was satisfied with the GMs statement on GAAR, but lack of clarity on the ground leads to sharp fall in the market, yesterday. BSE falls 2.2%

Despite the governmentâ€™s changes to the General Anti-Avoidance Rule, foreign investors have sold a net of Rs. 1,030 crore in Indian stocks on Monday and Tuesday, according to provisional data from the National Stock Exchange.

Analysts said the changes were still vague, and added the uncertainty would continue at least until 31 May, when a government committee is expected to provide guidelines.